White House Warns Middle-Class Tax Hikes Will Sap Retail Spending

President Obama's top economic advisors warned on Monday that a set of across-the-board tax increases set to take effect in January would result in consumer spending of $200 billion lower than projected levels for 2013, a blow to the economy that would likely hit all sectors of the retail industry.

A new analysis from the president's Council of Economic Advisers (CEA), a White House advisory body, has projected that allowing the current low tax rates for the middle class to lapse, coupled with a failure to "patch" the Alternative Minimum Tax to protect middle-class filers from higher tax liability, would reduce real consumer spending by 1.7 percentage points, amounting to a slowing of GDP growth of 1.4 percentage points.

That forecast is based on the projection that a typical middle-class family will see its tax burden increase by $2,200 next year if the current rates expire.

The CEA and the National Economic Council, another White House advisory panel, issued a report emphasizing the importance of the middle class to central economic indicators such as consumer spending, and calling for the extension of the current tax rates for all but the highest earners.

"(A)s we approach the holiday season, which accounts for close to one-fifth of industry sales, retailers can't afford the threat of tax increases on middle-class families," Jason Furman, principal deputy director of the National Economic Council, wrote in a blog post.

The sobering forecast comes amid a brisk start to the holiday shopping season, with early reports heralding double-digit increases in online sales.

It also coincides with lawmakers' return to Washington following the Thanksgiving holiday for what promises to be a busy lame-duck session. At the top of the agenda is the so-called fiscal cliff - the automatic tax increases and spending cuts that will take effect in January if the White House and Congress cannot agree on a deal.

The new report echoes the position that Obama has taken over the course of his negotiations with Congress and throughout the campaign, that tax rates for Americans with a household income below $250,000 should remain stable, while the wealthy should see their top marginal rate increase from 35 percent to 39.6 percent.

Since the election, congressional Republicans have indicated that they are open to a framework that provides for new revenue, though they have remained firm in their insistence that the revenues should come from economic growth and a reform of the tax code to end certain exemptions and deductions, leaving all of the Bush-era tax rates in place. Republican leaders have also demanded that any deal include meaningful spending cuts.

Of the $200 billion the White House is projecting would be siphoned off from consumer spending if the middle-class tax rates increase, $15 billion of it would come from groceries, and another $15 billion from durable goods excluding motor vehicles and parts. Another $7 billion would be drained from spending on clothing and footwear, with $17 billion coming from spending on other nondurable goods.

The National Retail Federation, the leading industry trade organization, was quick to pick up on the White House report, and amid its exuberance about the current holiday shopping season, the group expressed cautious optimism that policymakers will be able to strike a deal to avert the most damaging effects of the fiscal cliff.

"It is encouraging to see the Administration's acknowledgement that retailers and their customers will be among the hardest hit if our elected officials fail to address ongoing economic uncertainty," NRF President and CEO Matthew Shay said in a statement.

At the same time, he warned against "kicking the can down the road" with a set of piecemeal policy measures rather than structural reforms to the tax code and an overhaul of entitlement programs to address the ballooning federal deficit. In that scenario, Shay cautioned, the likely result would be a continued uncertainty that would chill investment and spending in the retail sector.

"If brinkmanship overtakes bipartisanship, we will continue to see less capital investment by retailers large and small, stifled job creation and dampened consumer confidence, which will ultimately lead to lower retail sales and potentially another recession," Shay said.

About the AuthorKenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects for more than four years, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here .

About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.

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